Costs and benefits of ISO 9000 registration

By Bob Tvrdik, CIRAS

ISO 9000, at least to industry, seems well understood. But questions
arise for which there are not good answers. These are, "Does it pay?" and
"What does it cost?" To answer these questions some qualification is needed
because the answers are not absolute. ISO can pay off in two ways, by
providing marketing benefits and by reducing costs. Look at marketing first.
If a small to medium size firm is a supplier to a major firm such as John
Deere or Case, it may soon have to be ISO certified to do business with them
at all. The added requirements seem more a threat than an opportunity, but
what if the buyer won't do business with someone not registered? If you face
elimination because you're not certified, you know the time for ISO is now!

If a company is not selling to a large firm like Deere, the advantage is
less clear. Most companies consider ISO because they are asked by an
important customer or through tracking competitors. The advantages: keeping
existing clients and the ability to bid for new business.

The cost reduction justification for ISO 9000 is reasonable, though
little is written about it. This is because (1) firms do not usually know
what costs can be attributed to a lack of process control quality, and (2)
firms usually focus on improving performance through increased
sales/marketing instead of reducing costs.

Calculating a standard benefit/cost analysis is difficult because each
firm is different. We must look at the experience of others and apply it
with a grain of salt to ourselves. The best data reported is by Imberman and
DeForest, published in ASQ's "Quality Progress" in 1995. This study tracked
Cost of Poor Quality or CPQ (e.g., rework, scrap), and compared these costs
to industry profits. Nearly all firms have such costs, but they seldom
collect them for an overall view. Study results are surprising. For the
firms surveyed, net profits were about half the CPQ! The implication:
cutting quality cost in half can increase profit more than a 10 percent
increase in sales!

A typical company with sales of 10 million dollars per year that reduces
quality costs by half could increase its profit by $200,000-$400,000 per
year! The ranges of CPQ to sales ratios for selected industries are
displayed in the table.

Eliminating cost is not easy. For any cost reduction to occur, the
company must first gain control of processes. ISO 9000 is the most promising
method to gain process control.

Now that we have an incentive for ISO, what does it cost?

Just as it is hard to get an exact dollar figure for cost reduction, it
is hard to get an exact dollar figure for the cost of ISO. Becoming ISO
certified involves similar categories of costs in all companies. You must
invest time and effort to upgrade documentation, train employees, provide
for gauge control, practice the system, and finally hire an independent
auditor or registrar. Each category has both internal and external costs.
How quickly these changes can be made affects cost as well.

The cost also depends on the process controls already in place. If you
now have process control methods from ASME, FDA, or other regulatory bodies,
the ISO cost may be low. But for firms with few formal methods in place the
price can be much higher.

Some costs, such as hiring and retaining a registrar, may be high in a
small firm and, while higher, will be less burdensome for larger companies.

For common comparison, many people use ISO cost per employee. Recently,
an ISO discussion line opened on the Internet,
iso9000@listserv.nodak.edu, offering data from companies and
consultants. A good picture of the range of costs emerges. Costs per
employee vary from a high of $4,500 to a low of $1,000. Enough detail is
provided to show that smaller companies are not always at a cost
disadvantage. Averages were not stated, but comments indicate that costs
range, or should range, from $1,500 to $2,500 per employee for initial ISO
registration. This matches the experience of the Iowa firms going through
the process who have published their results.

For any company, lSO 9000 is a major undertaking in time, commitment, and
money. The only way to be sure you are proceeding in a prudent manner is to
arm yourself with knowledge about the process.